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Personal Finance: What Should You Read In A Mutual Fund Before Investing In It? | Bombay News


Since the start of this year, asset management companies have announced around 100 new mutual funds, each fund targeting different investors with distinct risk profiles. Most of the new fund offerings (NFOs) were cheaper with low net asset values ​​(NAVs). The low NAV offers have attracted many lay investors blissfully oblivious to the details that need to be considered before investing in mutual funds. While a low net asset value justifies approaching the average cost in rupees and helps to accumulate more units initially, there are some hard facts that should not be overlooked when reading a fund for assess its prospects. Mutual funds differ because of portfolios and risk / return ratings, so before buying one you should assess and evaluate these aspects:

Check the different levels of risk

The risk factor is different for all categories of mutual funds. You need to check whether the mutual fund is very risky, moderately risky, or has low to moderate risk. For example, many people who are unable to keep up with and keep up with the movements of the stock markets prefer to invest in equity mutual funds. Although these are less risky than direct investments in stocks and equities, they carry a certain level of risk. Before investing in a mutual fund, check the inherent risk in the graphical representation of risk called the risk indicator. Each mutual fund has a level of risk assigned to it in the risk indicator – review this carefully before investing.

The portfolio matters

Usually we talk about portfolios while planning an investment basket or investing in our choice of stocks based on our appetite for risk. But did you know that you also need to look at a mutual fund’s portfolio to see which sector it is most invested in? Take for example two midcap funds. Axis Midcap Fund is more focused on the financial services sector with up to 17.49% investments in these stocks, while IT stocks make up 13.97% of the total allocation. Compared to this, Kotak Emerging Equity Fund has no IT stocks and its investment in the financial services industry represents 12.47% of its total portfolio allocation. Knowing the sectors in which a mutual fund invests allows you to make informed decisions: what is happening in the IT and financial sectors right now? How would the actions of companies in these sectors behave differently from those in the hospitality sector or any other sector that has been tainted by the effect of the pandemic.

Stock quality

Check the quality of the stocks in the portfolio. Track the list of company names and the percentage of investments made in them. For example, shares of TCS, L&T Technology Services, IRCTC, SRF Limited, Godrej Real Estate, etc. are expected to generate higher returns in the long run due to the nature of their business or enjoy monopoly status at the present time. Check to see if the highest quality stocks top the list, as their presence in the portfolio reflects the fund’s ability to generate higher returns on the amount invested. The quality of the stocks in the portfolio would be reflected in the returns that underline the performance of your portfolio.

Direct plans versus regular plans

When purchasing a mutual fund, you will have the option of choosing between direct and regular mutual funds. Basically these differ only in their expense ratios. As their higher net asset values ​​show, direct plans generate higher returns than regular plans. The expense ratio of the first is lower than that of the second. This is because direct plans can be invested without any middleman, while regular plans involve buying through an agent or broker and therefore involve commissions and brokerage fees.

Consistency of returns

Past performance is not a mark of guaranteed returns in the future. A mutual fund that returns 17% in one year and drops to 10% the next year is cause for concern. Compare that with a mutual fund that has given 10% returns year over year. Consistency of performance is important because it emphasizes the ability of the fund manager to hedge risk while achieving good returns above inflation. A consistent fund has a better chance of generating better returns each year for an extended period.

Fund manager performance

Evaluating the performance of a fund is the key to assessing the skills of a fund manager. The superior returns of a fund reflect the ability of the skilled fund manager to maneuver through the swinging movement of the stock market, particularly in situations such as the stock market crash of March 2020. Check the backgrounds of fund managers attached to the fund mutual funds to determine their ability to achieve high returns in line with your financial goal.

Net asset value performance

Many people are hesitant to invest in mutual funds with a higher net asset value. Comparing net asset values ​​is futile because mutual funds with the same portfolio will produce similar returns. However, some funds perform better than others or have more assets under management, thus explaining their higher NAVs. There is a common misconception that mutual funds with a lower net asset value are cheaper and, therefore, better. Also, just because some mutual funds have high net asset values, they shouldn’t be ignored.

Periodic rebalancing

Never invest in just one mutual fund just because its portfolio and program details match your financial goals. Check out different mutual funds, their portfolios and decide how they can add value to your investment goals. Before you start investing, check the asset mix in these mutual funds. In addition, you should visit frequently to check the performance of your mutual funds. Also, periodically rebalance your funds based on your new goals, which means buying back a non-performing fund to invest in a fund that promises higher valuations.

Personal Finance is a weekly column that aims to provide our readers with relevant and useful financial information.


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